Hachette vs. Amazon—Do We All Lose?

Personal Note: It has been several years (decades) since I last worked on news copy, and my journalism background is very rusty. Therefore, I have to admit to writing this with bias, and let you know that any opinions expressed here are mine as an individual and do not reflect an official stance by RMFW or its members . . .

Whether you love it or hate it, big business is here to stay, and stay involved with our lives. This is the story of two giants in the publishing industry and how we as authors might be involved.

BREAKING NEWS . . .

In May 2014, the New York Times broke a news story sure to rock the publishing industry. Hachette Book Group, fresh off an anti-trust lawsuit by the government, was the first of five major publishing houses required to re-negotiate pricing issues surrounding the ebook business. And talks weren't going well.

On the surface, the lines of this dispute were clearly drawn and easy to form opinions over. Hachette, as the publisher, would set prices for ebooks in a similar fashion to pricing for hardcover books. Some ebooks would be offered for sale at $12.99 up to nearly $20. Most of these ebooks were authored by some of the biggest names in the industry – James Patterson, Malcom Gladwell, Stephen Colbert, Douglas Preston, and more—and demand for these books would easily cover the prices asked.

On the other hand, Amazon wanted the books priced at no more than $9.99. Jeff Bezos, CEO of Amazon has a standing phrase, "your margin is my opportunity." His focus is to bring the lowest price to everything Amazon distributes to the consumer. And that includes books.

Some problems here:

The publishers claim the right to price their own products (often developed with hefty advances, public relations campaigns, and the costly editorial superiority of large publishing houses). If Amazon is allowed to price the books at below cost, the big houses could soon be in financial trouble.

Amazon called foul over that thinking. In a printed statement the company said, "With an e-book, there's no printing, no over-printing, no need to forecast, no returns, no lost sales due to out-of-stock, no warehousing costs, no transportation costs, and there is no secondary market—e-books cannot be resold as used books. E-books can be and should be less expensive."

The Wall Street Journal weighed in on the pricing dilemma even before this latest dispute arose. In an April 2012 article, WSJ reporters wrote "publishers feared that $9.99 would cement consumer price expectations and make it difficult to charge more (for books) in the future." That fear drove competitors into an alliance between the five major publishers (Hachette, Harper Collins, MacMillan Publishing, Penguin Random House and Simon and Schuster) and Apple computer, in which a new sales model would allow higher pricing to exist across the board. That's when Amazon complained and the government stepped in. The publishers and Apple ended up with millions of dollars of restitution to pay, and the demand that new negotiations take place.

THE PR WAR BEGINS

Soon after the break down this spring, Hachette and some of its authors began reporting on the semi-secret punishing tactics Amazon was using to drive down Hachette sales on Amazon. This is significant because Amazon owns 41% of all book sales and 61% of ebook sales in the U.S. The tactics being used were:

Slow delivery of book orders. Amazon claimed Hachette wasn't sending books over on time, and Hachette claimed Amazon was holding them back from consumers.

Removal of "Buy Buttons" from some titles

No ability to pre-order expected releases

Competitive advertising on a Hachette author's page that recommended different titles (by other publishers) at a better price.

THE GLOVES COME OFF

As more and more authors found out about, and voiced concerns over, Amazon's "bullying" tactics, Amazon tried offering to pay the authors 100% of its sales of their books while the price war continued.

Mr. Preston dove into the fray with a letter that quickly circulated among the famous and not-so-famous author community. "I wrote that letter hoping twelve brave souls would sign it. I've received over one thousand responses. The letter went viral," said Mr. Preston.

On August 10th that same letter appeared as an advertisement in the NY Times and immediately faced tremendous support, and large skepticism.

Authors like Stephen King, Donna Tartt, and Philip Pullman "signed" and endorsed the letter, while Amazon called Mr. Preston "entitled" and "an opportunist." The Amazon team was referring to the successful career Mr. Preston has built as an author, and hinted that personal greed was the reason Mr. Preston may have written his letter.

NOW IT'S OUR TURN

The above notes only nick the surface of the publishing world at work. Some other salient points to ponder include:

If Amazon succeeds in cowering Hachette, will it be able to use this battle to set up negotiations with the other major publishers to its advantage?

Are consumers right in their demands for the lowest possible price on books? Is there such a thing as a "free lunch" in publishing?

As authors, are we receiving a fair deal from publishers who have little to no cost in converting our paper and hard bound books to ebooks?

In the past, Amazon had a program called "The Gazelle Project" where small publishers were pressured out of existence with similar tactics. In a Hachette published book by Brad Stone, The Everything Store, Mr. Bezos is supposed to have set the tone by saying Amazon "should approach these small publishers the way a cheetah would pursue a sickly gazelle." Since that became public knowledge, the program name has changed to the "Small Publishers Negotiation Program."

While Amazon sells 50% or more of all books sold in the United States, those sales represent only about 7% of the giant distributor's sales. Are the big five gazelles now?

I tried to reach representatives from the biggest two players in this situation. I was essentially told "no comment," and given links to press releases and public letters.

Next month, I will write up interview notes from Mr. Preston--one man, one voice who has shown once again that there is power in words. The question is, will those words stand up to legitimate, albeit, hardball tactics by Amazon?

Liesa Malik is a freelance writer & marketing consultant living in Littleton, CO, with her husband and two pets. Liesa has built on her writing interest with a long-standing membership in Rocky Mountain Fiction Writers and recently joined the board of Rocky Mountain Mystery Writers of America. She is the author of Faith on the Rocks: a Daisy Arthur Mystery. Most days you can find Liesa either at her desk or at a local ballroom dance studio. For more about Liesa, please visit her website: LiesaMalik.Wordpress.com. More about Liesa on her website.

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13 thoughts on “Hachette vs. Amazon—Do We All Lose?”

This whole Amazon/Hachette controversy is both confusing and frustrating for me. I don’t like to jump on bandwagons and judge Amazon because I love shopping there, but I also agree some publishers overprice their authors’ ebooks. I respond by not buying those ebooks and getting the book from the library instead, so I think eventually the free market (and the customers’ decisions not to buy) would solve the price issue. Maybe Amazon is just impatient. Every decision I make to not purchase an ebook is business lost, not only to the publisher and the author, but to amazon.com.

Hi Pat and John,
Thanks for the great comments. I think the problem resides in the 4 areas of interest: the consumer wants as much for free or lost cost as possible. This drives the second group distributors, in this case, Amazon, to undercut the third group, publishers, as much as possible. Publishers are apparently working under similar splits to hardcover products, which upsets both distributors and authors (who are looking to make as much of a living as possible). Right now, only big name authors have a tremendous amount on the line, but self-publishers and smaller named authors are going to be affected as well. I’ll keep trying to figure out what’s going on.

I admit, I’m kinda rooting for Hachette for purely selfish reasons. With so many of the mainstream books being priced out of the market, it leaves a lot of easy sales for me.

The crux of the dilemma for Hachette (and their authors by extension) is that Hachette prices based on a cannibalization model. They price ebooks high to protect paper sales. They still believe their bread and butter is paper and ink. If they price the ebooks too low, they’ll lose paper sales.

They’re right on that.

What they’re losing sight of is that they’re losing sales already because many readers see an ebook and a paperback priced the same and – while some will buy the paper – others move on to something they can afford.

The other factor that Hachette seems to be ignoring is the price flexibility of demand. While books are not fungible — that is, you can’t swap a Stephen King novel for a Nora Roberts — many readers are finding they can swap out a $15 title by one of the mainstream authors for a $5 title by an indie.

While a few readers will sniff at some perceived reduction in quality, heavy readers will happily jump on the lower priced titles. As an author, I don’t make my living by selling to the book-a-month people.

First a disclaimer….I’m not a published author nor would I consider myself a “writer” by any means. At least not yet! I am learning and hope to have something by the end of the year. That being said, please forgive my grammar.

Patricia and Nathan thank you for your comments; you both had some really good points. However I believe that they (Publishers or Authors) should have the right to price the books at whatever price they want to on Amazon. After all, Amazon is another avenue that people have to make money via the web if they want, and books are no exception. Of course both statements above point out, e-books that are priced too high tend to end up causing a reduction in sales and lost opportunity for both the publisher and/or the author. Perhaps the authors should be demanding more money from the publishing houses to make up for lost wages since they would make more on the e-book than from a softback. (Unless it is a POD service) If it is at all possible, maybe keeping their digital rights so they can post it on Amazon themselves would be the right answer. After all 70% of 9.99 is better than the 10-20% authors might get after the publishers take their cut from any sales method. Simply pricing anything above 9.99 no longer qualifies for the 70% royalties from Amazon, so why do it?

Publishers negotiate the terms with their retail partners all the time. It’s part of the landscape. It’s important to understand that publishers do not sell books to readers. They sell books to bookbuyers who then hope to sell the books to readers.

In most cases that means an established margin price (about 43% for paper products the last time I looked) which means sellers – like B&N, for instance – frequently discount those prices. The “sticker” price is just window dressing. Because few retailers have the kind of clout that a WalMart or other big box chain has, those smaller retailers are forced to accept the established margin prices and terms while the big box stores get special arrangements.

Amazon is just Walmart on steroids. They aren’t in every neighborhood in Amerca. They’re on almost every computer in much of the world. Their market reach gives them unique access to retail sales. They are in a position to offer large providers like Hachette terms that they are unwilling to extend to the little guys like me.

Because large providers want the best terms possible, they’re negotiating.

The result is that the authors — who depend on the publishers to sell books and pay royalties — are being squeezed.

One other significant issue regarding these books. The authors group keeps saying things like “Amazon is blocking sale of my books.” This is – technically – incorrect.

1. Amazon is not blocking sales of those books. At most they have removed pre-order buttons for books they may not be able to sell at all on release. Make no mistake. Hachette needs Amazon a lot more than Amazon needs Hachette.

2. The books no longer belong to the authors. The only claim they have is with the publisher for their contracted share of royalties. Until such time as the copyright reverts back to the author, those books belong to Hachette. This is how that contract thing works.

When the publisher plays with swords, it’s the authors who get it in the neck. This isn’t the first time something like this has happened and I’m sure it won’t be the last.

This is one reason why I’ve had to turn down deals from the Bigs. The risk/reward calculations have all come out against my best interests.

“If it is at all possible, maybe keeping their digital rights so they can post it on Amazon themselves would be the right answer.”

Few presses and none of the Bigs are interested in this as a common practice. While a few high profile indies have negotiated print-only deals after making six-figures on their own, the reality is that this kind of negotiation generally doesn’t work, because publishers know that ebooks are insanely profitable for whomever holds the license.

That’s another reason I’ve had to turn down deals from the Bigs. I see no reason to have to get a day job to support my publishing habit because I’ve given most of the income to a global conglomerate.

Rob, I like your logic. A couple of points here: 1) Amazon can change the 70% at any time, so authors are vulnerable, and 2) Amazon has been known to work the Walmart model in a market it has dominated–books. The Walmart model is a phrase something like, “We’re your biggest client, and we own the majority of all sales in your market, so we will pay you what we want, and you can choose to sell at that price (often so low the vendor has little to no profit at all), or we’ll purchase elsewhere.”

Yes, but it would be dumb. Amazon may be a lot of things, but dumb isn’t one of them.

“2) Amazon has been known to work the Walmart model in a market it has dominated–books.”

This is why they keep offering programs that require authors to be exclusive via the Amazon Select program. As long as I can reach my readers directly – because I’m not in Select – they can’t lock me into taking their terms. They can offer me worse terms than I currently enjoy, but it’s unlikely because they’re not dumb.

Amazon isn’t just the company name. It’s their business strategy and it’s brilliant. They aggregate tiny trickles of income into huge streams. Some trickles don’t provide more than a drop in the bucket but others become gushers. They do what the publishers cannot — they publish every book that comes to them. It costs them fractions of a penny and the upside – even if it’s only one sale – becomes an ROI several orders of magnitude large.

Moreover, they can’t predict which of the trickles will turn into gushers. Their terms bring in hundreds of new trickles every single day. Would they attract as many if the terms were worse? Possibly, but even if NOOKPress is staggering, Kobo actually leads Amazon in European markets and is giving them a good run in Asia.

Why would they disrupt a model that is working for them so spectacularly by changing it?

The Bigs and the authors who publish with them? Yeah. They should be worried. That’s a model that’s out of balance because cannibalization is no longer the driving force in price setting. Paper is no longer where the profit is and hasn’t been for at least two years now. Margins are too thin. Distribution is too expensive. Physical stores have to rely on non-book income to survive.

Nathan, thank you for your comments. I can tell by your comments that there is still many things I will need to learn about the business side of things. The technology side of it comes easy for me (over 20 years in the IT field) so I have a healthy respect for Amazon, but not necessarily from the book aspect of it. Their networks and clouds they have built are amazing and have thwarted many hacker groups on many occasions. I specialize in security and hackers etc. now so for that I admire their work.

I will say that it is unfortunate that some of the brick and mortar stores are all going out of business. The only major one left is Barnes and Noble which saddens me as Boarders used to be a favorite book store of mine. Anyway, the real piece to that is as technology changes, so must we if we are going to keep up. I have seen this in several industries throughout my career with multiple companies and one theme remains the same in all the industries I have seen it affect. Change is coming, it is happening and it is easier to embrace and run with it than it is to fight it.

Again, thank you for your comments as I look forward to learning more from the people on here and hope one day soon I can actually say I am an author. :) Have a great weekend everyone!

Liesa, thanks for the information. As I said before I am not there yet, I don’t consider myself an author, so I don’t speak from experience. I have a few friends that are Indie authors and so I was going by what they have told me (in regards to how things work with Amazon) as well as what I have read.

I wouild agree with Nathan though that if Amazon decided to strip that 70% from the authors that they would only be shooting themselves in the foot and giving business over to another group like Kobo or Smashwords etc. to distribute electronically.

As far as the Walmart comparison goes, I believe that to be with any major company with a footprint. That leaves all the mom and pop shops looking for locations where they haven’t let big business in as of yet. I do have mixed feelings about that as well. On one hand I have a big family to support so I need things to be less expensive, on the other hand the dreams of people being their own boss and living the American dream is a hard one to follow if that dream leads you to being a small shop or store owner. Still I always support the local businesses when I can. 🙂

What is Amazon going to do to indie pricing and royalty rates if they find they can pressure big publishers to accept their ideas on lower pricing? Will they tell me next that I can only price my book at $2.99? Will they decide that the 70% royalty is too high? Who will negotiate for me when that time comes? Not Hachette, and most likely, not the Author’s League. I agree that large publishers are greedy SOBs when it comes to e-books, but I am also justifiably (I think) concerned about Amazon having its way over every single contract it makes. The best outcome here is a mutually (un)acceptable negotiated contract, but who will negotiate it?

“Will they tell me next that I can only price my book at $2.99? Will they decide that the 70% royalty is too high?”

I hear this a lot but the problem is that Amazon isn’t a monopoly and they want to keep their seat at the head of the table. As long as Nook, Kobo, and iBook offer royalties in the 70% range, they’re forced to match or risk losing share.

They’re not going to tell you you _have_ to price your book at $2.99 — the way Apple told musicians they had to price at 99c and 1.99 a track. They’re going to keep reaping the rewards of the marketplace of 2.99 to 9.99. They’d be stupid to put up a “do not enter” sign at the entrance to their gold mine.

Amazon is many things .. as I said before .. but they’re not stupid.

Let me put it to you this way.

What if you stood on the corner with a bucket of pennies and you let people take a penny if they gave you a dollar? Not a hundred percent, but — say ninety times out of a hundred – and people lined up around the block to take the deal because they like your pennies.

Would you do *anything* that would upset the arrangement?

How about if about one in a thousand gave you a hundred bucks?

One in ten thousand gave a hundred grand.

You have no idea which of the ten thousand pennies will give you the hundred thousand dollars. You just have to keep the bucket filled with pennies for people to take.

Now add in the reality that one in a hundred thousand pennies will return a million dollars.

Every penny is a sunk cost returning a ninety-fold return on the investment at the lowest level. Every dollar invested returns ninety. Every million dollars returns ninety million. Once in a while you get a bit more and once in a great while you hit a jackpot on top of it all.

Would you discourage people from lining up to take a penny from your bucket by changing the terms? By making them pay you half? Or by making it more difficult for them to take the penny by putting a lid on the pail that they have to pay to open?

I have no idea why this is so difficult to understand. First, Amazon makes very little on everything that they sell. In fact the company is far from truly profitable. Many shareholders are actually upset with Amazon over this very thing. Amazon’s standpoint is that gross sales will eventually bring about higher profit numbers, but not higher margins. That is why they are successful at bringing in business.

Amazon fights for the consumer. They don’t get more money by lowering sale price and getting the same margin. In fact they get less money that way per e-book. But, it is a game of volume. Get twice as sold e-books at a lower price and everyone still wins (as long as your margins are profitable). Tell me that an e-book costs $20 to produce and you will fail the lie detector. It is an e market and thus icing on the cake. Many people will still buy the book if they like it. So it becomes more of a “write a good book” and make more money scenario. That sounds fair to me!

Hachette wants gross amounts of money for an e commerce item. The book is already written, the work is already done. Trying to equate the cost onto the e commerce market is just silly. That is like saying that an e-newspaper should cost as much as the hard copy. It is just not an equitable comparison.
Make no mistake, the big name writers are making MILLIONS regardless of the e-book sales. That is a fact! The smaller names are the ones that get pinched. But, the reality is that I will pay $10 for an e-book. If you jack it up to $20 I am just going to find it someone uploaded for free. Most of us know that almost every e-book is out there on this great Internet for free. It is our deep embedded desire to do “the right thing” that keeps us buying what we could find for free. It is my desire to see Hachette and these authors do the right thing as well. No way should an e-book every cost more than half the price of a paperback copy. Pure and simple!

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